European oil majors finished 19Q3 reporting. Not surprisingly, a common theme was a decline in YoY growth rates on both earnings and revenue given the lower prices in oil and gas. Notables including BP and Total suffered a YoY decline of 40.9% and 20.1% in earnings, while revenues declined 11.0% and 10.1% respectively.

Macro environment looks gloomy

Brian Gilvary, CFO of BP stated, “looking now at the broader macro environment. Brent crude prices averaged $62 per barrel in the third quarter compared to $69 per barrel in the second quarter. Following the attack on the facilities in Saudi Arabia, prices temporarily spiked, although this was short-lived due to a faster-than-expected recovery in Saudi production. Prices were also tempered by rising trade tensions and increasing concerns over demand growth. Forward pricing is expected to continue to be influenced by a number of competing supply and demand factors, including future OPEC+ production strategy impacts many further unplanned outages, U.S. tight oil production performance and the extent of the global economic slowdown.”

OMV Chairman and CEO Rainer Steele echoed similar sentiment, “the market environment in the third quarter was the weakest since the end of 2017, characterized by lower oil and gas prices, impacting earnings across the sector”

Both CEO’s expanded on the decline in natural gas prices which was driven by higher levels of production, supply, and storage.Steele mentioned “driven by oversupply, European gas prices further declined in the third quarter, 28% lower quarter-on-quarter and 56% below the previous year’s level.”Gilvary alluded to a depressed price environment in 2021 due to “slower economic growth, slower Asian LNG demand growth and new LNG projects starting up is expected to result in some LNG export capacity being curtailed or underutilized.”

As a result, capital discipline will continue to be a theme to watch.Total CFO Jean-Pierre Sbraire alluded to maintaining ‘strict’ capital discipline, a trend seen among all energy players, including in the U.S.

Looking at Exhibit 1, we can see capex is expected to decline among European oil majors.Shell CFO Jessica Uhl mentioned, “for the full year 2019, we will keep our spend around the lower end of the $24 billion to $29 billion cash capital range.”

Exhibit 1: STOXX 600 Capex YoY Growth

IMO 2020

International Maritime Organization (IMO) is an agency that sets standards for marine fuel which is used on ships.In January 2020, a new regulation will come into effect which will require marine fuels to reduce sulphur content from 3.5% by weight to 0.5%.Known as ‘bunker fuel’, a heavy oil that is left over from the crude refining process once lighter gasoline has been separated is used heavily in the shipping industry.As a refresher, not all crude oil is the same.API Gravity and Sulphur content are the two determinants to describe crude.A ‘heavy sour’ oil will have lower gravity and higher sulphur content (i.e. greater impurities).

With the regulation, users of marine fuel will have to switch from high sulphurous oil to a lower sulphurous oil, which will reduce the demand for ‘heavy’ oil.As a result, we can expect the ‘light/heavy’ crude differential to increase, which means light oil will become even more valuable and command a price premium relative to heavy oil.

Gilvary highlighted, “looking to 2020, margins in light heavy crude differentials are expected to be supported by increased demand for marine diesel and very low sulphur fuel oil needed to meet the IMO’s new MARPOL bunker fuel specifications.”

Steele also states less demand for heavy oil. “… On heavy and sour crudes, I think the spread will widen. The market is getting less and less interested to buy that stuff.”Steele believes that as a result, diesel will become a beneficiary as an alternative source of fuel used in the blending component to create marine fuel which will conform with IMO 2020 regulation.

Repsol is expected to be a major beneficiary when IMO 2020 comes into effect, as CEO Josu Miguel is “optimistic related to the IMO impact and positive impact for refining system like Repsol’s refining system that is a system with a high conversion and fully prepared to capture the advantages of these changes.”
 

A focus on renewables

Equinor, Total, and Eni provided updates on ESG related activities.

Total CFO Jean-Pierre Sbraire mentioned, “in the renewable business, we added 500 megawatts of new solar and onshore wind farms in France. We sanctioned our first solar farms in Japan. We reached our 1,000th service station with solar panel. This is part of our ongoing plan to solarize 5,000 service stations globally and part of a broader plan to leverage renewable energy at our facilities throughout the group. And we joined forces with Envision Group to develop on-site distributed generation solar projects to B2B customers in China.”

Eni confirmed 150 megawatts of renewables under construction, with a target of 190 megawatts by year end.CFO Massimo Mondazzi reiterated the mission to contribute to UN Sustainable Development goals.“The new mission is the foundation of the company’s business model, which focuses on long-term inclusive development for our company and its host countries, considering all the sustainable development goals. In line with this mission, we already taken a number of commitments over the medium and long term, including 0 net carbon emissions for the upstream by 2030.”

Shell CFO Jessica Uhl also alluded to emissions-free environment, “we also have the ambition to maintain a strong societal license to operate and to thrive in the energy transition … on the transition to a net 0 emissions environment.”Shell is also working on both greenfield and brownfield projects including the Pierce Depressurisation Project in the U.K. and Gumusut-Kakap Phase 2 project in Malaysia, which will be levers for future growth as indicated by Uhl.

Equinor CFO Lars Bacher confirmed it was developing the world’s largest offshore wind project located offshore at Dogger Bank in the North Sea, 100 kilometres off the east coast of England.Combined with its Empire Wind project in New York, it is looking to become a leading player in offshore wind.

Looking at Eikon by Refinitiv, all three companies have strong ESG scores of 86, 84, and 85 respectively (out of 100).Exhibit 2 indicates high ESG scores among all European oil majors.

Exhibit 2: STOXX 600 ESG Scores